Taxpayer left with £2.4bn paper loss in RBS takeover

The government's new banking authority will start work on Monday by seeking three new board directors for Royal Bank of Scotland — now majority-owned by the taxpayer after the £20bn government bail-out.

Existing shareholders in RBS shunned the fundraising by what had been Britain's second-biggest bank until the credit crunch struck last year, leaving the taxpayer with 57.9% of the bank - and a £2.4bn loss on the basis of the current share price.

Only a handful of existing investors took up the offer to subscribe to new shares at 65.5p because the shares had been trading below that level, giving them no incentive to support the cash call. The shares closed last night at 55.3p, also leaving the directors of the bank, including the departing chief executive Sir Fred Goodwin, with a paper deficit.

The Edinburgh-based bank was raising £15bn through the share sale while the government is also buying £5bn of preference shares which must be paid off before ordinary shareholders are able to receive dividends again.

Just 0.24% of the 22.9bn shares being issued were bought by shareholders, prompting the new management team led by chief executive Stephen Hester to express "regret" about the low take-up.

The government stake, funded by the issue of government bonds known as gilts, will be controlled by UK Financial Investments, which will be chaired by J Sainsbury boss Philip Hampton. The body, destined to keep the bank stakes at arm's length from government, has also hired John Crompton from Merrill Lynch to devise and execute a strategy for the sale of the holdings, which also include Northern Rock and Bradford & Bingley. In the coming weeks, Lloyds TSB and HBOS will be added to its stable.

Agreeing to three new non-executives for the board of RBS, which also needs a new chairman when Sir Tom McKillop retires at next year's annual meeting, is the body's main priority.

Hester, while regretting the lack of interest from existing shareholders, said he understood that "market sentiment toward the banking sector made this [rights issue] uneconomic in the short term".

"We must put the past behind us and move forward with a clear focus on what we need to do next. We will focus on rebuilding RBS on its powerful customer franchises globally and, in time, deliver the economic returns that all our shareholders expect and deserve," he said.

He has already put management consultants at McKinsey to work on reviewing the operation, which expanded rapidly with Goodwin at the helm, starting with the acquisition of NatWest in 2000 and a spate of other deals, including insurance company Churchill and Charter One in the US before culminating in last year's ill-timed takeover of the investment banking arm of Dutch bank ABN Amro.

Much of the expansion is likely to be wound down by Hester, who is expected to sanction job cuts, particularly in the investment banking operations.

Goodwin, who stopped being chief executive last week, will leave at the end of January. Decisions will also need to be made about RBS's sponsorship of sports such as Formula 1, golf and rugby amid much speculation that the bank is trying to pull the plug on some of the multimillion pound deals. The bank said the sponsorships were "naturally reviewed on a regular basis to ensure they are aligned to our business objectives".

As the taxpayer took control of RBS, Gordon Brown visited the workforce of Halifax, which is part of the HBOS group due to be taken over by Lloyds TSB.

Derek Simpson, Unite joint general secretary, said: "This visit gave the staff an opportunity to raise their concerns in relation to the current turmoil across the financial services sector."

The number of jobs to be cut when Lloyds takes over HBOS is yet to be announced, but there are persistent rumours that as many as 40,000 out of a near 140,000-strong workforce are under threat.